The retirement crisis

Two decades ago, early retirement was a high priority for many Canadians. To heck with working until the traditional retirement age of 65! They wanted to quit at 60 or even 55. A life insurance company cashed in big-time on this national desire with an advertising campaign called “Freedom 55”.

Well, forget it. According to a new study released on Statistic Canada on October 26, the average 50-year-old worker can expect to remain on the job until the age of 66. That’s three and a half years longer than was the case in the mid-1990s.

“During the 1980s and early 1990s, there was a marked trend toward early retirement prompted by high public-sector deficits and downsizing among private-sector organizations,” the report says. “However, since the mid-1990s, the tide appears to have turned.”

The report, written by Yves Carrière and Diane Galarneau, says that the percentage of older people in the workforce is increasing sharply. As of 2010, one out of every six workers was over 55.

The Statscan study doesn’t speculate as to why we are seeing such a significant trend towards delaying retirement, but polls and opinion surveys provide some answers. For example, a Harris/Decima poll conducted for Scotiabank and released in earlier this year found that more than two-thirds of respondents said they plan to keep working after reaching retirement age. Of these, 38 per cent will do so because they won’t have enough money to live on. Another survey, this one for TD Waterhouse, discovered that 67 per cent of baby boomers are worried they won’t have enough money to retire, while only 15 per cent feel comfortable about their situation.

These are troubling results and they suggest that Canada is on the brink of a potential retirement crisis as the baby boom generation hits 65. For years, governments had assumed that when that happened, the labour force would be depleted leaving fewer workers to support an army of retirees demanding more medical care, drawing Old Age Security and CPP, and costing Ottawa and the provinces a fortune. Now we’re starting to hear suggestions that with more older workers staying on, younger people will be squeezed out of the job market.

My new book, Retirement’s Harsh New Realities, addresses these issues, which I believe should be of concern to all Canadians. The book will be released by Penguin Canada in December but here is a sneak preview with an excerpt that focuses on how much income you will need once you stop work.

How much money do you need?

“How much money do I need to retire comfortably?” It’s a question I get asked a lot. I wish it was one I could answer! Unfortunately, there is no easy response and no magic formula. It all comes down to “It depends” and there are a lot of variables to consider.

Start with your planned retirement age. Time was when 65 was the standard but not any more. Retirement has become a moving target with an increasing number of people working into their 70s. About the only thing we can say with any certainty is that the idea of retiring young has become an elusive dream for most people.

The longer you plan to work, the less you need to save for retirement. The math is simple: more years of employment income and pension credits, fewer years of living off pensions and savings.

Next, think about your retirement lifestyle. It will almost certainly be more active than that of your parents and grandparents, thanks to the advances in medical care and greater consciousness of the importance of nutrition and exercise. An active lifestyle is a lot more fun than staring at the TV all day but it costs money to travel, play golf, spend winters in the Sunbelt, or whatever.

Then there’s the question of how long you’ll be around. In an ideal world, we’d die on the day our money ran out but that’s not the way it works. Life expectancy has been increasing at a breathtaking rate.

According to Statistics Canada, a baby girl born between 1920 and 1922 had a life expectancy of 61 years. A boy born in the same period could expect to live to 59. After the Second World War, it took a big jump: a baby boy born in Canada between 1950 and 1952 could expect to live to age 66 while a girl would survive to 71.

The second half of the 20th century saw more big gains. Baby girls born between 2000 and 2002 have a life expectancy of 82 years, 11 years longer than half a century before. Boys also gained 11 years, to a life expectancy of 77. The rate of increase has slowed somewhat since then but the trend is still in place. Baby girls born between 2005 and 2007 have a life expectancy of 83 years while boys had reached 78.

And the older you are, the greater your life expectancy. Statistics Canada found that in 2007, the average 65-year-old could expect to live another 19.8 years — 18.1 years for men and 21.3 years for women. This means that people who reach what was once considered the normal retirement age need to have adequate financial resources to sustain them well into their 80s.

All of this reinforces my “It depends” answer to the question of how much money you’ll need. But if you are going to have any shot at putting together a realistic savings plan, you need to make a serious attempt at estimating your post-retirement costs.

The simplest way to do this is to use your current family income as a base and multiply by a target percentage for post-retirement income. What percentage should that be? In the past, the federal government and many actuaries used a figure of 70 per cent based on the theory that expenses will decline after you quit work. It now seems that’s not the case.

Statistics Canada looked at household spending and income patterns from 1982 to 2008 and came up with some surprising numbers. It turns out that people in their early seventies spend only 5 per cent less than they did when they were in their forties. Unfortunately, their income fell by 16 per cent. The spending patterns changed: less went to food and clothing, more to health care and residential costs. But the overall result, Statscan found, is that it costs almost as much to live after retirement as it did before. If you don’t plan for that, you’re in trouble!

Based on this, I suggest your target should be to ensure you will receive 95 per cent of your pre-retirement income after you stop work. In that case, my quick and easy formula would be:

This year’s family income × 95 per cent = Retirement spending needs

So if your household income this year is $70,000, after retirement you’d need $66,500 in today’s purchasing power to maintain your standard of living if your family’s spending pattern is anywhere similar to Statscan’s findings.

Of course, if you know you’ll be able to get by on less you can aim lower but you’d better be very sure of your calculations. I prefer to err on the high side — it is always better to have too much money rather than too little!

Retirement’s Harsh New Realities is available for pre-publication orders at 24 per cent off the suggested retail price. Go here.

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Photo © Patti Guerrero